A Guidebook to Investing in Gold

By Jared Dillian

“A gold mine is a hole in the ground with a bunch of liars standing next to it.”

I started investing in gold in 2005. Not a bad time, right?

Here’s why I started: I was the ETF trader at Lehman Brothers at the time. A couple of guys came by to talk about this crazy idea they had about a gold ETF. I think one was from the World Gold Council and the other was from State Street. The WGC guy brought along a 10 ounce bar of gold. At the time, it was worth almost $6,000.

The ETF was SPDR Gold Shares (GLD).(* Please see disclosure below)

I ended up buying GLD, because I’m a trader. Trading stocks is what I do, so it’s easy for me to buy something with a ticker. I didn’t even know you could buy physical gold. It was 2005 or 2006, so I’m not even sure if the online bullion dealers were up and running yet. If you wanted to buy gold, you’d have to be in the know, go to some hole-in-the-wall coin dealer, get your face ripped off.

I have owned GLD since. And along the way, I learned a lot about investing in physical gold, and I bought that, too.

But that’s not the interesting part.

I Loathe Gold Culture

One of the things I figured out as I was starting to invest in precious metals is that a lot of the other guys investing in gold and silver were… not the kind of guys I really wanted to hang out with. Neckbeard McGoldbug. You know the type.

I’m talking about the ridiculous conspiracy theories, the bizarre politics that are so far right, they’re left. The hatred toward banks. I still don’t understand it. These are supposedly right wing guys who found themselves on the same side of most issues as Matt Taibbi and Elizabeth Warren. The apocalyptic outlook, the relentlessly bearish views, the outright refusal to participate in one of the biggest (and most obvious) stock market rallies ever.

I am allegedly a right wing guy—and I’ll own it—but I am not that.

The other thing I discovered about these guys is that it’s useless to try to sell newsletters to them. They don’t believe in intellectual property. So part of my gold investing career has been figuring out what I am and what I’m not. I guess you could call me a classical liberal and monetarist who takes a keen interest in gold.

Freeze It, Personalize It, Polarize It

As the gold rally crested and rolled over, the mainstream financial media really started to go after the gold bugs. They were super annoying on the way up, and the (mostly liberal, Keynesian) pundits were crushing them on the way down. It’s gotten to the point where the only people left buying gold are… Neckbeard McGoldbug, and they’ve been thoroughly maligned for it.

If you recall, the whole idea was that quantitative easing (printing money) was going to create a lot of inflation. Plus, the budget deficit was about $1.8 trillion at the time, so we would have to monetize the debt.

It was a pretty good argument. And it worked for years. Then it stopped working.

The inflation the gold bugs predicted never happened. It was the biggest hoax perpetuated on investors, ever. So the beatdown from the Keynesians continues to this day, on Twitter, on blogs, in the news.

But maybe the gold bugs weren’t wrong—just super early.

I’m Not an Economist, But…..

I do remember this from a class I had: the quantity theory of money.

MV = PQ   I’m sure this looks familiar to many of you. So M, the supply of money, has gone way up:

But V, money velocity, has gone way down:

Given constant Q (quantity of goods), P (price) remains pretty much unchanged. So we will eventually get our inflation—if money velocity turns around and heads higher. There aren’t any good theories as to why money velocity continues to plummet. At least, I haven’t read any. I think we will have a similar inability to predict when it rises. This is overly simplistic, but I’m a simple guy.

Gold Is/Is Not for the Long Run

There are people who say gold should be x percent of your portfolio in all weather. I get it. It tends to be negatively correlated with other stuff, so it reduces the volatility of a portfolio. And as long as central banks are doing what they’re doing, the long term case for gold is pretty much intact, recent price action notwithstanding.

But let me tell you this. If central banks ever got religion and pulled a Volcker and hiked rates to the moon, it would be a remarkably bad time to hold gold. On the other hand, throughout history, there have been times where people were very sad that they didn’t own gold. I talk about one of them here.

It’s very real, and the history of fiat currencies is also quite sad. I am the furthest thing from an alarmist. I don’t think the dollar, or the euro, or any other currency is going to collapse, at least not imminently. But I also think the Fed doesn’t want to raise interest rates, possibly ever.

The ECB is printing, and you have the prospect of direct monetization. Japan is just insane. Even Sweden is printing money. And I can see a scenario where Canada, Australia, and Norway are all doing it too.

So: if the whole world is printing money, I’m okay with being long gold.

But in 2015, you really shouldn’t care about what people think.

*Disclosure: at the time of this writing, Jared Dillian was long GLD, SLV, and physical gold and silver.

Jared Dillian

The article The 10th Man: A Guidebook to Investing in Gold was originally published at mauldineconomics.com.

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Here's What the Next Gold Bull Market Will Look Like

By Jeff Clark

We measured every bull cycle of gold stocks and found there have been eight distinct upcycles since 1975.
We also discovered something exciting: Only one was less than a double. (A second was 99.9%.)
Even more enticing is that the biggest one—a 601.5% advance in the early 2000s—occurred just after a prolonged bear market.

And our current bear market is longer than that one.

To get a sense for the potential upside, we applied the percentage gain from each of those upcycles to our recommended BIG GOLD picks.

We can’t show you our entire portfolio out of fairness to paying subscribers. But look what those gains would mean to GDX, the Gold Miners ETF (based on the June 1 price).

Gold ETF	Current Share Price	1976– 1980	1982– 1983	1986– 1987	1989– 1990	1993– 1994	2000– 2003	2005– 2008	2008– 2011
		554.2%	205.1%	141.8%	51.5%	99.9%	601.5%	206.4%	272.5%
GDX	$19.49	$127.51	$59.45	$47.14	$29.53	$38.96	$136.72	$59.72	$72.60

Keep two things in mind about this table:

1. The percentage gain from each past bull market is calculated using an index. The stronger companies will perform better than a static ETF.

2. It’s not unreasonable to think that the gains in the next bull market will be similar to some of the higher returns listed above. That’s because stocks will be rising from the depths of one of the more severe bear markets.

Here’s what the price for popular royalty company Royal Gold would look like if it matched past bull markets.

Royalty Company	Current Share Price	1976– 1980	1982– 1983	1986– 1987	1989– 1990	1993– 1994	2000– 2003	2005– 2008	2008– 2011
		554.2%	205.1%	141.8%	51.5%	99.9%	601.5%	206.4%	272.5%
Royal Gold	$64.23	$420.21	$195.93	$155.34	$97.30	$128.38	$450.56	$196.79	$239.26

You might think royalty stocks won’t show similar gains going forward. It’s true they’ve already performed well. However, it’s more likely they’ll be wildly popular than anything else. That’s partly because there are only a few of them in this industry.

Now take a look at the prices our top silver pick would hit.

Silver Producer	Current Share Price	1976– 1980	1982– 1983	1986– 1987	1989– 1990	1993– 1994	2000– 2003	2005– 2008	2008– 2011
		554.2%	205.1%	141.8%	51.5%	99.9%	601.5%	206.4%	272.5%
Top BIG GOLD Silver Pick	$3.71	$24.27	$11.32	$8.97	$5.62	$7.42	$26.02	$11.37	$13.82

If silver rises along with gold in the next bull market—something we think is extremely likely—this small niche market will absolutely soar.

No other sector is as depressed as the mining sector. A return to anything close to some of the stronger past bull markets will hand us tremendous gains.

The June issue of BIG GOLD focuses on the top silver pick listed in the table. I’m convinced it will at least triple from current levels in the next precious metals bull market.

We have two very specific reasons why it will do so. And these two factors are unmatched by almost any other mid-tier or major producer.

Get our analysis along with the name of this stock in the just-released BIG GOLD.

We also include a special offer on bullion that has numismatic potential. These coins sell at bullion prices, yet will likely return much greater profit than standard bullion. And they come at discounted prices you won’t find elsewhere.

It’s “The Two Best Silver Plays to Buy Today”—a highly actionable issue that tells you exactly what to buy and why. Get it now.



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